Oil prices continue to rise on possible extension of output cuts

Oil prices extended gains for the eighth consecutive session on Wednesday, following reports that Saudi Arabia was urging fellow OPEC members to extend production cuts.

Global benchmark Brent crude remained above the $55-mark, and was last up 0.7 percent at $56.61 per barrel (bbl) – its highest level in over a month. West Texas Intermediate (WTI) was 0.5 percent higher at $53.68/bbl.

Top OPEC exporter Saudi Arabia has told fellow members that it wants to extend the producer group’s six-month agreement to reduce output, The Wall Street Journal reported, citing sources familiar with the matter.

OPEC agreed last November to cut supply by a combined 1.2 million barrels per day (mbd) to 32.5 mbd, in order to tackle the global oversupply and prop up crude prices.

While the deal initially boosted oil prices, its impact has been offset by higher US output and inventory in recent weeks.

“In Q1 there was increasing concern and confusion over rising US crude stocks and reviving US production. Focus was misplaced on US crude stocks rather than on total crude, gasoline and distillate stocks,” said Bjarne Schieldrop, chief commodities analyst at Sweden’s SEB.

However, investor confidence has returned as the production cuts of OPEC and non-OPEC members are having a positive impact.

“Inventories are drawing down. Contango will shift to backwardation. That alone will lift spot prices higher,” he told Argaam, noting that support from some OPEC members for continuing supply cuts in H2 2017 will also help prices.

Brent will remain above the $55-mark, at least in Q2, he added.

In a report on Wednesday, Bank of America Merrill Lynch said that the oil market “may be under-appreciating OPEC’s internal debates and scrutiny of shale oil production.”

“A more flexible renewal of the deal for three months rather than six months is among proposals being examined,” BofAML said, adding however, that this could be negatively perceived by the market unless properly communicated.

A six-month renewal of the deal may end up being the preferred option, therefore, particularly as this seems to be supported by Saudi Arabia, the lender said. 

Write to Jerusha Sequeira at jerusha.s@argaamnews.com